Federal bankruptcy and appeals courts have become confused about what a tax return is for bankruptcy discharge purposes. A recent decision has taken the position that a return is not a return when it is filed late. Thus, income tax does not qualify for discharge in bankruptcy when the tax return is filed after the date it is due. McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. Miss. 2012), decided in early 2012, upheld lower court decisions to that effect.
Some Income Tax is Dischargeable in Bankruptcy
Income tax is the most common tax consumer bankruptcy debtors are concerned with when they file for protection in bankruptcy court. The bankruptcy code allows income tax to be discharged under certain circumstances. The principal rule for discharge of income tax is that the debtor must have told the tax collector how much tax was due. This is normally done by filing a tax return
Changes in The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Congress passed sweeping amendments to the Bankruptcy Code in 2005. Before the 2005 amendments, the law required a return to be filed before the tax could be discharged. When the law was amended, additional language was added to §523(a)(1)(B) one of the provisions containing rules for the discharge of tax. The new language permitted the taxpayer not just to file a return; it also provided that the return could be “given”. In fact, it was not just a return that could be filed or “given”, the law permitted that an “equivalent report or notice” would satisfy the information delivery requirement.
An additional 2005 change in the law included something like a definition of the term “return”. In an unnumbered paragraph after §523(a)(19) the new language says that to be a “return” for the purposes of the statute, it must meet “the requirements of applicable nonbankruptcy law (including applicable filing requirements.)” There is additional language that includes nonbankruptcy court orders and judgments obtained by stipulation in the definition of “return”. It also includes something prepared under Internal Revenue Code §6020(a) and excludes something prepared under IRC §6020(b). The §6020(a) return is virtually unknown. The §6020(b) return is generally thought to be what the IRS calls a “substitute for return”. This substitute is a document created by the IRS from third party information that calculates tax when the taxpayer fails to file a tax return.
An Odd Interpretation of the Law
It is odd that discharge of tax in bankruptcy is denied when a return filing is disqualified based on language of the unnumbered paragraph. The statute doesn’t even require that a “return” be the document that is filed. An “equivalent report or notice” should qualify the tax for discharge. If a tax return is not a return, why is it not a “notice” or “report” that is its equivalent?
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Last modified: March 17, 2013